S.Bold-Erdene reports how the company is trying to get the best deal possible, despite dithering by whimsical politicians. An article in the last issue showed how chances of Erdenes Tavan Tolgoi issuing an early IPO on an international stock exchange, whether in Hong Kong or London, were getting slimmer day by day. One reason was the delay by the State Great Khural to take certain decisions on the State-owned company’s stock. The latest news is that it is almost certain that the IPO will be on the Mongolian Stock Exchange, and not on a exchange abroad. Those who have followed developments feel that the company is being forced by circumstances to do this.
Legislative business in Parliament has been seriously slowed down following the collapse of the coalition government. Among the drafts and amendments now in limbo is the proposed amendment to the 39th Act issued by the State Great Khural in 2010. The delay in getting this through is the direct reason why Erdenes Tavan Tolgoi has been denied the opportunity of an IPO in London and Hong Kong, for which so much effort was made.
However, politicians know how crucial it is for their own interest for the company to issue its IPO before the election. Their chances with the electorate depend on their fulfilling pledges made during the previous election and in showing how much foreign investment has been attracted. They are thus ready to come up with just about any idea that would enable them to list on an international market. B.Enebish, Executive director of Erdenes Tavan Tolgoi, has said that the preferred means to have an IPO as scheduled was by using Depositary Receipts (DR) at an international market. But this is possible only after an IPO on the Mongolian Stock Exchange (MSE). There is enough information that the company has set the ball rolling. The Stock Exchange itself and some broker-dealer companies are getting ready, and the Financial Regulatory Commission (FRC) is also busy considering ways how the whole thing can be done in the absence of any provisions in the current Securities Law concerning DR, Custodian Banks and such related needs.
All these issues were covered by amendments proposed to the Securities Law that have remained stuck at the Ministry of Law and Internal Affairs for over a year and a half now. There is no chance of their being passed during the Autumn session of Parliament, and so the FRC is rushing to put in place some new regulations to tide over the issue. The major ones relate to DR and custodian bank. On its part, Erdenes Tavan Tolgoi will have to submit all documents to the FRC and the MSE by the end of February.
Erdenes Tavan Tolgoi has several issues to resolve before being eligible to offer DR on London Stock Exchange, the most important of which is to select a custodian bank. When DR is used, the investors do not directly receive stock certificates; the custodian bank plays the role of a mediator. It ‘purchases’ the receipts from investors for what they paid, and receives and holds the stocks on the clients’ behalf. It thus plays a pivotal role in the whole transaction and its choice is, accordingly, crucial.
The concept is new for our country and has never been tried before. Major international commercial banks are competing to be the choice. Some broker-dealer companies want a foreign bank to do the job, as they feel that allowing banks in Mongolia to operate in the securities market would be a great risk because of their inexperience. Any failure on the part of the bank can be disastrous for the securities market.
As of now, it is not clear, in the event that Erdenes Tavan Tolgoi does have its IPO on MSE, what percentage of the stock will be traded there and what percentage will be released as DR. Incidentally, there are ways to go on London Stock Exchange using DR without an MSE IPO, but that will not help develop the local stock exchange. Some Russian natural gas and oil companies and Vale of Brazil also first issued an IPO on their local stock exchanges and then used DR internationally. If Erdenes Tavan Tolgoi follows the same route, it will have a huge impact on the development of MSE.
Baruun TsankhiThe next headache for Erdenes Tavan Tolgoi is what to do with Baruun Tsankhi. After the Government had transferred the entire Tavan Tolgoi mining licence to Erdenes Tavan Tolgoi, the company decided to split it into two parts and to let a strategic investor operate on of them. Their rationale was that this would facilitate resolution of thorny issues like railways, transit transportation and access to seaports, but now it seems the division of the mine might impair the success of the IPO. Baruun Tsankhi has 1.2 billion tons of reserve, 65 per cent of which is coking coal, while Zuun Tsankhi’s reserve is estimated at 795 million tons, of which 78 per cent is coking coal. These are figures accepted by the Minerals Council. Initially, Erdenes Tavan Tolgoi had said the IPO would cover the total assets of both Zuun Tsankhi and Baruun Tsankhi. The company expected to earn money from exploration work on Zuun Tsankhi and from taxes paid by strategic investors at Baruun Tsankhi. Analysts demurred and the company has now veered round to the view that excluding Baruun Tsankhi would not be wise.
A final decision will have to be taken on Baruun Tsankhi before the IPO is announced. So far, there is no official word on who will be the strategic investor(s) there, and it is widely believed that consortiums from Russia, China and USA have held fresh talks on their stand at the bidding. Erdenes Tavan Tolgoi is likely to start operating Baruun Tsankhi around April without waiting for the choice of strategic investors. Putting both mines into operation will have a impact on the company’s value in the international market. One feels it is the right decision because waiting for the strategic investor means loss of time and the result could well be lower price for the stock.
With all the various roadblocks created by whimsical politicians, Erdenes Tavan Tolgoi LLC is trying its best to have a profitable IPO. We can only wish them success.